How Unusual Options Activity Predicted the Buyout in Coupa Software

How Unusual Options Activity Predicted the Buyout in Coupa Software

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Before we break down the well-timed trade in Coupa Software and the news that followed, let’s talk about

What Is Unusual Option Activity?

You can think of Unusual Option Activity as the breadcrumbs left behind by the “smart money” — hedge funds and institutional traders. By utilizing teams of researchers, sophisticated algorithms, and immense warchests, the “smart money” has an uncanny ability to stay one step ahead of the market… an ability that they leverage through the power of options.

The trades they make remain hidden under the surface of the market, buried beneath a sea of option order flow — unless you know what to look for. Things like:

  • Trade volume that greatly exceeds open interest
  • Trades that risk a substantial amount of capital
  • Trades that require large market moves in a short period of time

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When all three of the above conditions are true at once, it’s worth paying attention. But when multiple, repeated trades like these pop up over and over again in the same underlying stock, that’s unusual option activity.

Let’s look at a specific, recent example.

Bullish COUP Unusual Options Activity

Last week on December 5th, a massive order was made in a relatively little-known, mid-cap stock: Coupa Software (COUP). 

That trade: Bullish vertical call debit spreads bought at the $70 and $80 strikes. Those strike prices will be important later. The total value of that trade, when it was made, was about $1 million dollars.

It wasn’t the first bullish order of 5,000 options we’ve seen in COUP. Just two weeks before, with COUP trading at just $45.43, another matching 5,000 order of OTM call options were bought at the March expiration. 

That trade value at the time of purchase: $3,225,000.

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Colossal Call Buying in COUP: What Makes it Unusual Options Activity?

When Market Rebellion identified this trade for its members, it stood out for a few reasons:

Repetition: When we see repeated unusual options activity in the same name, at the same timeframe, and especially in the same buying style (repeated sets of 5,000 OTM options), that piques our interest.

Volume vs. Open Interest: Those 5,000 March calls were bought against an open interest of just 230. That means this was clearly fresh buying. Those 5,000 vertical call debit spreads were bought against open interests of 1,292 and 629 respectively. When the volume of a single trade is significantly higher than the entire open interest of that contract, it’s a flashing sign that we need to pay attention, because a big buyer has just stepped into the arena. 

Trade Value: When a hedge fund or financial institution spends a million on a single one-off stock, it’s worth taking a look. But when a hedge fund or financial institution spends a few million on a specific, targeted options trade, with a nearby deadline, it’s even more attention-grabbing. They aren’t buying this for the long term. They aren’t buying it because it might go up “one day.” They’re likely trading off of specific information that individual traders don’t have access to. 

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Coupa Software Bought Out One Week After Unusual Options Activity

This is why we do what we do. Why we follow the smart money. 

“Shares of COUP rocket higher after agreeing to $81 per share sale to private equity firm Thoma Bravo.”

“Bought for $81 per share.” Source: Google, Market Rebellion

Recall that the vertical debit spread bought last week was for the $70, $80 strikes. That means the potential gains of the trade were capped at $80 per share — just one dollar below the buyout value, and the trade ended the same week that the buyout was made.

That’s extremely specific. 

Additionally, recall that the value of the above trades was a combined $4.225M. Today, those options are worth a combined value of $18.865 million dollars — a more than 4X increase from the initial trade price. 

So the question now is: 

Did this trader know that Coupa Software (COUP) was soon to be bought out? 

If not, this huge bet, placed in a little-known software stock, at a highly specific strike price, was just an extremely well-timed, well-targeted bet. We’ll let you be the judge.

Lastly, a more important question: 

What can active traders do now? The truth is, there is almost certainly no juice left in this COUP software trade. The stock is up over 26% today, and the news is out. Trying to trade it here is like showing up to a basketball game after the fourth quarter is over. You’re late, you’re probably wasting your time, and maybe even wasting your money.

Instead, what active traders can do is pay attention to the next big unusual options activity purchase. Not necessarily the big trades in the SPX or the big names like Apple. The little known ones. The ones like Coupa Software, that make you ask, “Why would someone bet on that?

But it takes more than just watching the order flow to follow the smart money — you have to have to the skills, knowledge, and discipline necessary in order to exploit their moves.

That’s what sets Market Rebellion apart from the competition. We’re not just regurgitating option order flow — we’re backed by a team of professional options traders, former floor traders, and licensed CMT’s whose mission it is to transform unusual options activity into actionable trade ideas founded on technical analysis and options knowhow. Interested in upping your trading game? Ready to try and catch the next “smart money” rocket? 

Unusual Options Activity

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